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Penalty interest

Anyone who thinks about refinancing a mortgage - or breaking open a fixed-rate period - may be faced with a refinancing penalty. This transfer penalty is also known as penalty interest. On this page we discuss what penalty interest is and when it is charged by the bank. We also explain how the calculation of penalty interest works.

Calculate your penalty interest directly online

Penalty interest = compensation for loss to the bank

When you take out a mortgage or agree on a new interest rate, you in fact enter into an interest contract with the bank. You promise to pay the agreed interest rate on your mortgage for a specific period (the fixed-rate period). If you do not comply with this agreement and the bank is disadvantaged, you must pay compensation for that disadvantage. We call this compensation the penalty interest.

Only penalty interest at a lower interest rate level

The bank can only charge a fine if it is actually at a disadvantage. That disadvantage is if the interest at that time is lower than the interest you should have paid. You pay off your mortgage - the bank can lend that paid off money again, but at a lower interest rate. A disadvantage for the bank.

If the interest is higher, there will be no penalty. The bank can then earn money because you pay off the loan earlier than planned. After all, by lending it out again, the bank will receive a higher interest rate.

Calculation of penalty interest

Calculating penalty interest has long differed per bank. In 2017, the Bostons Authority for the Financial Markets (AFM) issued guidelines on how penalty interest should be calculated. This is done in a number of steps:
  • How would the mortgage pay off?
  • What are the relevant interest rates?
  • What are the interest amounts lost by the bank?
  • What is the value of those lost amounts at the moment?
Below we'll cover these steps further:

How would the mortgage pay off?

To know what the bank is missing out on, it is first important to look at the agreed progress of the mortgage. The following matters are important here:
  • the outstanding mortgage debt at this time
  • the amount that can be repaid without penalty
  • the amount that would be repaid from the mortgage type:
    • monthly repayment in the case of an annuity mortgage or linear mortgage
    • accrued capital plus agreed future savings amounts with the savings mortgage or bank savings mortgage
    • this is not the case with the interest-only mortgage and the uncertain capital build-up in investments is not taken into account.

What are the relevant interest rates?

When determining the bank's disadvantage, two interest rates are considered:
  • Contract rate: the interest that you would pay according to the interest rate agreement
  • Comparative rate: the interest the bank can now receive if the money is re-loaned for the remainder of your fixed-rate period
Your mortgage interest is still fixed for 7 years at 4%. That 4% is your contract interest. If the bank now takes out a new mortgage with the interest fixed for 7 years, it charges 2.5% mortgage interest for this. That 2.5% is the comparison interest.

Compare current mortgage rates for different fixed-rate periods

What are the interest amounts lost by the bank?

By canceling the fixed-interest period, the bank misses interest on your mortgage every month. For the rest of the period, a calculation is made of the amount the bank is missing out on each month. This is easy with an interest-only mortgage: the outstanding debt (minus the penalty-free repayment) remains the same. The lost interest is the difference between the contract interest and the comparison interest, calculated on that amount for the remainder of the period. This is different for mortgage types with a fixed repayment agreement. There, the debt decreases slightly every month. The lost interest amount must therefore be calculated per month.

What is the value of those lost amounts at the moment?

We cannot simply add up the lost interest amounts to determine the penalty interest. If you now pay them in one go, the bank can use that money to do other things and make a profit. That is why you get a kind of discount on the total amount. This is calculated by 'discounting' the interest amounts, by calculating the 'net present value'. The addition of all discounted amounts of lost interest - that is the bank's disadvantage. The bank may charge you this disadvantage as penalty interest.

In short, calculating the transfer fine is quite complicated. To get an indicative picture of what the fine would be in your situation, you can consult this penalty interest calculation .